We study the economic determinants of conditional conservatism. Consistent with prior
literature, we find that contracting induces only conditional conservatism and litigation induces
both conditional and unconditional conservatism. We extend prior evidence by Qiang (2007) by
showing that taxation and regulation induce not only unconditional conservatism, but conditional
conservatism as well. We show that in certain scenarios taxation and regulation create incentives
to shift income from periods with high taxation pressure and high public scrutiny to periods with
lower taxation pressure and lower public scrutiny. These income shifting strategies are
implemented by recognising current economic losses that, given managerial incentives to report
aggressively, would not have been recognised otherwise, or by delaying the recognition of
current economic gains that would have been recognised had circumstances been different

dc.description.sponsorship

We acknowledge financial assistance from IESE Research Division, the Spanish Ministry of
Science and Innovation (ECO2008-06238-C02-01/ECON and SEJ2007-67582-C02-02ECON), and the European
Commission INTACCT Research Training Network (MRTN-CT-2006-035850)